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Contagion Effects in the Aftermath of Lehman’s Collapse: Evidence from the US Financial Services Industry

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  • Dumontaux, N.
  • Pop, A.
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    Abstract

    The spectacular failure of the 150-year old investment bank Lehman Brothers on September 15th, 2008 was a major turning point in the global financial crisis that broke out in the summer 2007. Through the use of stock market data and Credit Default Swap (CDS) spreads, this paper examines the investors’ reaction to Lehman’s collapse in an attempt to identify a spillover effect on the surviving financial institutions. The empirical analysis indicates that (i) the collateral damages were limited to the largest financial firms; (ii) the most affected institutions were the surviving “non-bank” financial services firms; (iii) the negative effect was correlated with financial conditions of the surviving institutions. We also detect significant abnormal jumps in the CDS spreads that we interpret as evidence of sudden upward revisions in the market assessment of future default probabilities assigned to the surviving financial firms.

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    File URL: http://www.banque-france.fr/uploads/tx_bdfdocumentstravail/DT-427_03.pdf
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    Bibliographic Info

    Paper provided by Banque de France in its series Working papers with number 427.

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    Length: 58 pages
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:bfr:banfra:427

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    Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
    Web page: http://www.banque-france.fr/
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    Related research

    Keywords: bank failures; systemic risk; bailout; too-big-to-fail; contagion; financial crisis; regulation; market discipline; Credit Default Swap.;

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